Profit and Loss Statement (P&L) (2024)

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Guide to Understanding the Profit and Loss Statement (P&L)

Last Updated January 29, 2024

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What is Profit and Loss Statement?

The Profit and Loss Statement (P&L) is a financial statement that starts with revenue and deducts costs and expenses to arrive at net income, the profitability of a company, in a specified period.

Profit and Loss Statement (P&L) (1)

Table of Contents

  • How to Read a Profit and Loss Statement
  • Profit and Loss Statement Calculator
  • What is an Example of a Profit and Loss Statement?

How to Read a Profit and Loss Statement

The profit and loss statement, or “P&L statement”, is interchangeable with the income statement, one of the three core financial statements that all publicly traded companies are obligated to file with the SEC.

For public companies listed in the U.S., the 10-Q profit and loss statement (P&L) must be filed each quarter, with a 10-K annual filing due for the 4th quarter.

  • Quarterly Filing (10-Q) → 3x Per Year (and 4th is 10-K)
  • Annual Filing (10-K) → 1x Per Year

Together, alongside the cash flow statement (CFS) and balance sheet (B/S), the P&L statement provides a detailed depiction of the financial state of a company.

In particular, the P&L statement shows the operating performance of the company as well as the costs and expenses that impact its profit margins.

Upon assessing a company’s P&L statement, one can gauge the company’s ability to:

  • Generate Revenue → “Top Line” Sales Growth
  • Manage Operating Costs → e.g. Cost of Goods Sold (COGS) and Operating Costs (SG&A, R&D)
  • Earn Profits → e.g. Gross Margin, Operating Margin, EBITDA Margin, Net Profit Margin

How to Prepare the Profit and Loss Statement (P&L)

The profit and loss statement (P&L) can be prepared by an accountant under two different methods:

  1. Accrual Accounting
  2. Cash Basis Accounting

Method 1. Accrual Accounting (ASC 606)

  • Under the revenue recognition principle, revenue is recognized when “earned” under GAAP standards (i.e. product or service delivered to the customer regardless of whether cash payment was received)
  • Expenses are matched in the same period as the corresponding revenue they helped create, which is called the matching principle.
  • P&L statements filed under accrual accounting are required to abide by U.S. GAAP reporting standards, such as the ASC 606 revenue recognition standard.

Method 2. Cash Basis Accounting

  • Under cash basis accounting, revenue is not recognized until the customer pays in cash to the company for the products or services received
  • Expenses under cash accounting, similar to revenue, are not recognized until the cash outflow occurs – meaning that the company has actually paid the third party in cash.
  • P/L statements prepared under cash-basis accounting are more common for private companies.

What is the Format of a P&L Statement?

The standard profit and loss statement (P&L) will consist of the following line items:

P&L StatementLine Items
Revenue
  • Sales Generated from Selling Products/Services to Customers
Less: Cost of Goods Sold (COGS)
  • Costs Directly Associated with Core Revenue Production
Gross Profit
  • Gross Profit = Revenue – COGS
Less: Operating Expenses (SG&A)
  • Indirect Costs NOT Directly Related to Revenue Creation
Operating Income (EBIT)
  • EBIT = Gross Profit – Operating Expenses
Less: Interest Expense
  • Periodic Payments on Debt Obligation (i.e. the Cost of Debt Financing)
Pre-Tax Income (EBT)
  • EBT = EBIT – Interest Expense
Less: Taxes
  • Legally Mandatory Payments to the City, State, and Federal Government
Net Income (“Bottom Line”)
  • Net Income = EBT – Taxes

Profit and Loss Statement Calculator

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

Profit and Loss Statement Template (P&L)

Suppose we’re creating a simple profit and loss statement (P&L) for a company with the following financial data.

  • Revenue = $100 million
  • COGS = $40 million
  • SG&A = $20 million
  • Interest Expense = $5 million
  • Tax Rate = 30%

Given those assumptions, we can enter them into our P&L format, with the following line items being formulas, as opposed to hard-coded inputs.

  • Gross Profit = $100 million – $40 million = $60 million
  • EBIT = $60 million – $20 million = $40 million
  • Pre-Tax Income (EBT) = $40 million – $5 million = $35 million
  • Net Income = $35 million – ($35 million × 30%) = $25 million

What is an Example of a Profit and Loss Statement?

For a real-world example, the income statement of Apple (NASDAQ: AAPL), the leading consumer electronics and software company, is shown below.

Apple Income Statement Example (Source: 2022 10-K)

How is the P&L Statement Different for Private Companies?

Note that for many private companies, revenue is recorded as “income” and the expenses are often combined in a single section, rather than distinguishing between:

  • COGS vs. Operating Expenses (SG&A)
  • Direct Costs vs. Indirect Costs
  • Operating Items vs. Non-Operating Items

The lack of standardization for private companies makes adjusting the financials often a necessary step to properly evaluate the actual financial performance of the company.

For instance, in the context of an acquisition where the acquirer follows accrual accounting, adjustments to a target company’s financial statements would be necessary if it follows cash accounting.

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